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PORTFOLIO SELECTION

Portfolio Selection

Objectives

The objectives of this unit are to:

discuss the basic tenets of Sharpe's single-index model and how the model

simplifies selection process

Structure

11.1

Introduction

11.2

11.3

11.2.1

11.2.2

11.2.3

11.2.4

Single-Index Model

11.3.1

11.3.2

Covariance of Returns

11.3.3

11.3.4

11.4

11.5

Summary

11.6

Key Words

11.7

Self-Assessment Questions/Exercises

11.8

Further Readings

11.1

INTRODUCTION

portfolios will be defined by the `efficient set'. But we left the question of actually

finding the efficient set unanswered. This unit will first provide a logical approach to

delineating efficient set. We will then discuss some of the practical problems of

implementing this approach, and present another model, known as `single-index

model', that simplifies the portfolio selection process to a great extent. Finally, we

will indicate some other portfolio selection techniques.

11.2

We may recall that an efficient set is a continuous curve (see Figure 10.3 in Unit 10)

which, in turn, means that there are infinite number of efficient portfolios. This poses

a typical problem to the investors. How can one determine the composition (i.e.,

combination of assets and portfolio weights) of each of an infinite number of efficient

portfolios? Markowitz did contemplate this problem and, in a major breakthrough,

presented a solution algorithm based on `quadratic programming' technique. While a

complete description of the algorithm, which is referred to as Markowitz's `critical

line method', is beyond the scope of this unit, we may give you a rough idea of what

is being accomplished by it:

11.2.1

Constrained Minimization Problem

As we know, an efficient set can be determined by minimising portfolio risk (i.e.,

return variance) for any level of expected return. If we specify the return at some level

and minimize

23

Portfolio Theory

risk, we have one point (i.e., a portfolio) on the efficient frontier. Thus, we need to

solve the following constrained minimisation problem:

Minimise variance( 2 p ) =

i=1

j=1

x x

i

ij

1)

2)

The sum of the portfolio weights for all assets in the portfolio must be equal

to 1; (

xi = 1 )

i=1

3)

(xi 0, i = 1, ..., n). In other words, short sales are not allowed.

This is a quadratic programming problem because of the presence of terms like x2j , and

xi , xj in the objective function.

11.2.2

Lagrange Multipliers Technique. We will explain the procedure with a three-assets

case and using the following example data:

Equity Shares

Monthly Expected

Return (%)

3.5

Ashok Leyland

Standard Deviation

(%)

11

ACC

9.0

20

Grasim

4.5

12

Variance-Covariance Matrix

Ashok Leyland

ACC

Grasim

Ashok Leyland

ACC

.012

.009

.009

.040

.007

.014

Grasim

.007

.014

.014

Let us suppose that x1, x2 and x3 are the portfolio weights corresponding to the equity

shares of Ashok Leylend, ACC and Grasim respectively. The portfolio weights must

add up to 1, i.e.,

xi+x2+x3= 1

Let us further assume that our target expected rate of return (Rp) is 5 per cent. With

these assumptions, we have:

a)

0.05 =.035 x1 +.09x2+.045 (1-x1 - x 2)

which on simplification yields

.1 x1-.045x2+.005=0

b)

2

2

2

2(p) = [x1 * 0.012] + [x2 * 0.04]+ [(1-x1-x2) 0.014]+ [2 * .009 x1 x2]+ [2

which on simplification can be written as

2

2

2 (p) = [0.012 x1 ] + [0.04 x2 ] + [0.014 x1 ]+ [.004 x1 x2] + 0.014

24

Following the Lagrange Multipliers method, we now write the objective function as

Minimise Z = 2 (p) + [R p * - R p ]

Portfolio Selection

or, Minimise Z = [0.012 x12] + [0.04 x22]+ [0.014x1]+ [.004 x1 x2]+0.014+ [.01x1 0.45 x2+.005]

where is known as the `Lagrangain multiplier'. The expression within the bracket

ensures that the return constraint will be always satisfied while minimizing the

variance.

Thus values of x1, x2 and for which Z will be minimum, can be obtained by setting

the partial derivatives equal to zero, and then solving the equations simultaneously.

This is shown below:

z/x1

Solving the above set of equations, we get

X1=

.445

X2=.210

X3 = .345

= .248

Thus, for a target expected rate of return of 5 per cent, the `minimum variance' set or

`efficient portfolio' will correspond to an allocation by 44.5 per cent of the fund to

Ashok Leyland, 21 per cent to ACC, and the remaining to Grasim. If we plug the

portfolio weights into the objective function, we find

2 (p)

or p

= .0117

= .1089

So, our minimum-risk portfolio will have a standard deviation of returns of 10.8 per

cent.

The value of in our solution indicates the incremental change in the value of

objective function (i.e., the variance) that one might expect as a result of an

infinitesimally small change in the constraint (in this instance, the target expected

return), Since the objection function is nonlinear, its slope changes continuously and

so should .

11.2.3

The process discussed above can be repeated to find as many points as desired on the

efficient frontier, each time starting with a specified target expected rate-of return. In

actual practice, standard computer packages are available which can find solutions

quickly and accurately. For our example case of three equity shares. Table 11.1

shows ten efficient portfolios identified by the application of such a package.

Table 11.1: Ten Efficient Portfolios

Portfolio

1*

3.9

4.5

9.9

10.2

58.6

50.4

ACC

0.0

10.7

Grasim

41.4

38.9

3* *

5.0

5.6

6.2

10.8

11.7

12.8

44.5

37.7

31.3

21.0

33.0

44.2

29.3

24.5

Composition (%):

Ashok Leyland

34.5

25

Portfolio Theory

Portfolio No.

10

6.7

7.3

7.9

8.4

9.0

14.1

15.4

16.9

18.4

20.0

Composition (%):

24.9

18.5

12.2

5.8

0.0

Ashok Leyland

ACC

Grasim

55.3

19.8

66.4

15.1

77.6

10.2

88.7

5.5

100.0

0.0

offers lower level of risk than this.

**

application of Lagrange Multipliers Technique.

Once sufficient number of efficient portfolios are determined, it is a simple matter for

the computer, using its capability for graphics, to draw the graph of the efficient set.

Figure 11.1 shows the graph drawn by the computer package.

Figure 11.1: Efficient Frontier

Risk

In this context, it would be interesting to know the concepts of `corner portfolios' as

introduced by Markowitz. Any set of efficient portfolios can be described in terms of

still a smaller sub-set of efficient portfolios, which Markowitz termed as `corner

portfolios'. The distinguishing feature of two adjacent corner portfolios is that: (a) one

portfolio will contain either all the assets which appear in the other, plus one additional

asset, or (b) all but one of the assets which appear in the other. Thus, while moving

along the efficient frontier curve from one corner portfolio to the next, portfolio weights

will vary until either one asset drops out of the portfolio or another enters. The point (or

the portfolio) at which .a change in the composition of assets takes place marks a new

corner portfolio. For instance, portfolios numbered 1 and 4 in Table 11.1, may be

considered as corner portfolios.

An important property of corner portfolios is that any combination of two adjacent

corner portfolios will result in a portfolio that lies on the efficient set between the two

corner portfolios. For example, if an investor puts 30 per cent of his or her available

funds in the portfolio numbered 1 and 70 per cent in the portfolio numbered 4 (see Table

11.1), then the resulting portfolio of the following composition (or portfolio weights)

will be another efficient portfolio lying between the corner portfolios 1 and 4.

26

Ashok Leyland

ACC

Grasim

successive corner portfolios, and proceeds next to delineate a set of efficient

portfolios lying between every two adjacent corner portfolios. Each of these

portfolios will correspond to a dot in the return-risk space, which can be finally

connected to draw the graph of the efficient set.

11.2.5

Portfolio Selection

It is easy to see that the Markowitz's approach to trace efficient set is extremely

demanding i n its input data needs and computation requirements. This has been

probably best expressed by Markowitz himself : "...it is reasonable to ask security

analysts to summarize their researches in 100 carefully considered variances of

returns. It is not reasonable, however, to ask for almost 5000 carefully and

individually considered covariances". Indeed, while analysts and portfolio managers

are accustomed to thinking about expected rates of return, they are much less

comfortable in assessing the possible ranges of variation in their expectations, and are

usually, not at all accustomed to estimating covariance of returns among assets.

The problem is made more complex by the number of estimates of covariance (or

correlation) required. For a set of 200 shares, for example, we need to compute [200

(200-1)/ 2] = 19,900 covariance. It is unlikely that the analysts will be able to directly

estimate such a staggering number of inputs. Obviously, what we need is an alternate

formula for portfolio variance, that lends itself to easy computation even when we are

dealing with a large set of assets. However, an understanding of Markowitz process

would sharpen your understanding on the portfolio theory and management though

you may not use in your day to day life Markowitz method of portfolio construction

for stocks.

Activity 1

Define the following

i)

Efficient set

ii)

iii)

Diversifiable Risk

11.3

SINGLE-INDEX MODEL

Markowitz named William Sharpe (1963). In the 1950s, after techniques for

estimating the required inputs to this model were perfected, packaged, and marketed

as computer software, modern portfolio really took off in terms of practical

applications. Now the single-index model is widely employed to allocate investments

iii the portfolio between individual equity shares, while the original more general

model of Markowitz is widely used to allocate investments between types of assets,

such as bonds, shares, and real estate. In the discussion that follows, we present the

basic tenets of the `single-index model', with reference to investment in equity shares.

27

Portfolio Theory

11.3.1

Essentially, the single-index model assumes that the returns of various securities are

related only through common relationships with some basic underlying factor. In the

words of Sharpe, this factor "may be the level of the stock market as a whole, the gross

national product, some price index, or any other factor thought to be the most important

single influence on the returns from securities". A casual observation of share-price

movements, at least, tends to support this line of argument. There is considerable

evidence that when the stock market goes down, most shares tend to decrease in price.

For instance, on the date of budget, several stocks move in the same direction

depending on the assessment of the budget on the economy and industry. It appears,

therefore, that one reason share returns might be correlated is because of a common

response to market changes as measured by the movements in, say, share price index.

To understand the above assumption of the single-index model more precisely,

consider Figure 11.2, where we have related the returns of a hypothetical share to the

returns on the market index.

Figure 11.2: ACC Return vs. Sensex Return

The line running through the scatter points is the 'line of best fit', or an estimate of what

is known as a share's `characteristic line'. Algebraically, the characteristic line can be

defined as

Ri

= a i + i R m

Ri

ai

performance-a random variable;

Rm

(11.1)

where

i (beta) = the slope. of the characteristic line that measures the expected change

in R, given a change in Rm

It is useful to break the term Ri , in two components:

1.

2.

In terms of graphical presentation (see Figure 11.2) e 1 (or residuals, a s they are

frequently referred to) measure vertical deviations from the characteristic line. With

this, equation (11.1) can now be written as

R i = i + i R m + ei

(11.2)

where Rm and ei , (both random variables) are conveniently assumed to be not correlated

with each other.

28

It is further assumed that the residuals are not correlated across shares of different

companies; that is, ei, is independent of ej for all values of i and j. This is an important

assumption; it implies that the only reason shares vary together, systematically, is

because of a common co-movement with the market. Thus, single-index model assumes

away all other possible effects on shares' returns, such as industry effects.

11.3.2

Systematic Risk and Diversifiable (or Residual) Risk and Covariance of

Returns

With some manipulations of equation (11.2), we get the following important results:

(a)

the expected return, R i = j + i R m

(b)

(c)

covariance of returns between shares i and j, ij = i j 2 m

Portfolio Selection

It is apparent from (a) above that the expected return has two components: a unique or

non-market part, a, and market related part, i Rm. Even though shares have many

common characteristics and, as a result, tend to move together, their numerous individual

and distinguishing properties cause shares to co-move with the market at different rates.

Accordingly, how sensitive a share's price is to changes in the overall market i.e. the

value of its `beta' is of great significance in determining the expected return.

Like the expected return, we can always split the variance of share's returns into two

parts, as shown in (b) above. The first component 2i 2 m , is called the `systematic risk' or

`market risk' of the investment. Since 2 m is the same for all shares, systematic risks will

differ among different shares accordingly to the magnitudes of their `betas', i . Simply

stated, beta measures sensitivity of a share's price movements compared with those of the

market index. Shares having betas less than 1 can be said to be `defensive'. One per cent

increase (decrease) in the market return is likely to be accompanied by a less than one per

cent increase (decrease) in the shares' rate of return. The investors are thus defended to

some extent against the occurrence of major down fall in the market return. On the other

hand, shares with individual beta values greater than one are considered to be more

`aggressive' or more risky, as one per cent increase (decrease) in the market return is

likely to be accompanied by an even greater increase (decrease) in the shares' rates of

return. A beta of one implies `average' riskiness; every one per cent return on the market

is associated with one per cent opportunity return on the share. Beta can be negative as

well, reflecting that share prices can rise when the market falls and vice versa; but this is

normally unusual.

The systematic risk is caused by macro events like oil crisis, an unexpected change in rate

of inflation, etc. The macro events are broad and affect nearly all shares to one degree or

another, and they may have an impact on the general level of stock market. Thus, one

cannot reduce systematic risk by diversifying investment across different shares. That is

why the systematic risk is often called `non-diversifiable' risk.

The second component of variance of share's returns, 2 ei , is known as `residual

variance' or `unsystematic risk' or `diversifiable risk'. The source of this kind of risk is

`micro' events, which have impact on individual shares but no sweeping impact on other

shares. Examples include the introduction of a new product(s) or the sudden obsolescence

of an old one. They might also include labour strike lockout or the resignation or death of

a key person in the firm, or splitting up of a business family. Since micro events affect

only the individual shares under consideration, their impact can be reduced to a great

extent by holding a diversifiable portfolio. We will explain how diversification of risk

takes place after a while.

At this point, we may recall that under Markowitz model we are required to compute

covariance of returns for every pair of assets comprising the portfolio. We have also

observed that without having estimates of covariance, one cannot compute the variance of

portfolio returns. However, if the single-index model is a valid description of the process

generating shares returns, there is no need for direct estimates of the covariance. All that

we need to know are the values of share betas and variance of returns on market index;

the covariance between any two shares i and j can next be obtained easily by employing

the

29

Portfolio Theory

relationship as noted above. Needless to say that the relationship is much less

demanding in terms of estimation procedure and computation time.

What is more amazing to note here is that the single-index model does not require even

the indirect estimates of covariance of returns between shares. The model provides a

still simpler formula for computing variance of portfolio returns. We will now

explain this.

11.3.3

Variance of Portfolio Returns

We begin by restating that the total risk or variance of returns on share `i' is given by

2i

= i 2 m + 2 ei

(11.3)

This equation holds-for a portfolio of shares as well. Rewriting the equation for a

portfolio, we get

2i

2 p 2 m + 2 ep

(11.4)

Where the subscript `p' denotes a portfolio.

It can be further shown that

n

p =

i i

i=1

and,

2 ep

2 ei

i=1

weights are squared.

To illustrate the above formula of portfolio variance, let us consider the following two

shares:

Share

Beta

Residual Variance

Ashok Leyland

0.54

98.2

Grasim

1.13

62.7

Suppose, an investor is planning to put equal amounts of his investible fund in these

two shares. Then we have

p

= 0.54 x.50+1.13 x -.50=0.56

2 ep

If 2 m is equal to 81.0 per cent, the variance of the returns of the portfolio under

consideration will be given by

2p

= 8.1%

Let us now add one more share to the above portfolio, say, the share of ACC with a

beta of 1.63 and residual variance of 179.6 per cent. Suppose, the investor decides

once again to invest equal amount. This time p will work out to be 11.7 percent,

whereas 2 ep , will be 37.8 per cent.

It is interesting to note that while the portfolio's systematic risk component ( p ) has

increased due to the addition of a more risky share, its non-market related risk

component has declined. Given the single-index model's assumption that residuals

(ei's) of different shares are not correlated (we have already explained this assumption),

it is not difficult to

30

shares (n) in the portfolio is increased. Assume for a moment that an investor forms a

portfolio by placing equal amounts of his funds into each of n shares. Equation (11.6)

then becomes

Portfolio Selection

2 ep = [ 1 ] [ 1 ] 2ei

n i=1 n

where the term within the bracket denotes average residual variance of the shares

comprising the portfolio. As the number of shares in the portfolio gets large,

portfolio's average residual variance falls so rapidly that most of it is effectively

eliminated even for moderately sized portfolios.

At this stage, it would be appropriate to contrast the procedure for computing

portfolio variance as outlined above with that of the Markowitz model. We have

mentioned earlier that for a portfolio of 200 shares, Markowitz model requires 19,900

estimates of covariance. Under the single-index model we need, however, only 200

estimates of beta, 200 estimates of residual variance, and one estimate for the variance

of returns on market index. Indeed, this is a dramatic reduction in the input data for

computing portfolio variance.

But how accurate is the portfolio variance estimate as provided by the single-index

model's simplified formula? If it is the Markowitz formula, we know that the

variance number of perfectly accurate, given, of course, the accuracy of the

covariance estimates. Besides, the formula makes no assumptions regarding the

return generating process. On the other hand, the single-index model assumes that the

market factor solely determines the shares' returns and residuals. are not correlated

across different shares. Thus, the accuracy of the single-index model's formula for

portfolio variance is as good as the accuracy of underlying assumptions. Quite

obviously, the assumptions are not strictly accurate. Many researchers have found

that there are influences beyond the market that cause shares to move together. In

addition, empirical evidence suggests that residuals are correlated to some degree,

which is not altogether unexpected. After all, if something (good or bad) happens to a

company, some other companies, such as its suppliers and competitors, would be

affected simultaneously. The residuals that appear for the shares of these other

company would not, therefore, be independent of each other. However, one can

always expect that the degree of correlation would not be large enough to impair the

relative efficiency with which the single-index model estimate the portfolio variance.

11.3.4 Estimating Beta and the Diversifiable Risk Component

The estimation of beta and the diversifiable risk component of a share involves fitting

a `characteristic line' as shown in Figure 11.2, such that the vertical deviations of the

scatter points from the fitted line are minimized. The statistical procedure for

obtaining a line of best fit is known as `simple linear regression' or `ordinary least

squares method (OLS)'. The beta can be computed manually or using computers.

Today, analysts generally use computers to get beta value. For instance if you have

the monthly returns of a Market Index (like BSE Sensex) and an individual stock's

return (say Grasim) in the Microsoft Excel sheet, you can easily compute the beta

using a function called =SLOPE(Range of Stock Return, Range of Market Return).

At the end of the Unit, the computation of beta is illustrated.

Although the above estimation procedure looks quite straight forward, it is fraught

with several practical problems. For instance, what should be the length of beta

estimation period-two years, three years or more? Or, should we base our calculation

on annual return data? There are many shares which are not regularly traded on the

stock exchange; accordingly, their price quotations remain unchanged even the case

of ill-traded shares? No doubt, the literature on the subject provides some answers to

all such questions, but they need be verified empirically in our context. Unfortunately,

there is dearth of empirical studies with the Indian shares' data. Even if we obtain

satisfactory estimates of historical data, we still face the problem of estimating future

(or ex ante) beta. What is of concern to us is betas for future holding period, and not

the historical betas.

Since large-scale expectational data on returns of individual shares as well as of market

index are not available, one cannot directly estimate future betas by fitting regression

31

Portfolio Theory

lines. So, the historical beta must be estimated first and then we can make some

adjustments to it for deriving the future beta.

Activity 1

i)

List out two major points of difference between Markowitz's approach and

Sharpe's single-Index Model of selecting optimal portfolio.

ii)

iii)

So far we have considered investment in risky assets like equities. However, an

investor can also invest in `risk-free assets such as `treasury bills' or `government

securities'. Besides, in our analysis the investor is not allowed to use borrowed money

to invest in a portfolio of assets. This means that the investor is not allowed to use

financial leverage. If we take into account these new opportunities to the investor, we

will notice a major impact on the shape and location of the efficient set. We shall

discuss this situation in the next Unit on Capital Market Theory.

We now take a note of some other portfolio selection models that seem to hold great

promises to practical applications. One such model is the `multi-index model'. There

are different variants of this model and each of them is developed to capture some of

the non-market influences that cause shares to move together (recall that single-index

model accounts for only market related influences). The non-market influences, in

essence, include a set of economic factors or industry characteristics that account for

common movement in share prices. While it is easy to find a set of indices that are

associated with non-market effects over any period of time, it is quite another matter

to find a set that is successful in predicting covariance that are not market related.

There is still a great deal of work to be done before multi-index models consistently

outperform the simpler one.

Another model that takes into account a wide spectrum of practical considerations in

portfolio selection is the goal-programming model. In real life, an investor's goals

and desires transcend. the notion of a trade-off between only risk and return. For

example, an investor may prefer to invest some minimum amount in several different

shares, but at the same time he or she may not like individual investment to exceed a

specified limit. Additionally, he or she may prefer dividend income to capital

appreciation. There may also be a desire not to allow the portfolio beta to be either

above or below a predetermined level. Apart from holding such diverse goals and

desires, the investor may even set the order of

32

model is ideally suited to provide an optimal solution. Further goal programming

solution can be easily obtained by available computer packages.

Portfolio Selection

11.5 SUMMARY

This unit has provided some insights into Markowitz's approach to trace the efficient

set. The application of Markowitz's model requires estimation of large number of

covariance. And without having estimates of covariance, one cannot compute the

variance of portfolio returns. This makes the task of delineating efficient set

extremely difficult. However, William Sharpe's `single-index model' simplifies the

task to a great extent. Even with a large population of assets from which to select

portfolios, the number of required estimates are amazingly less than what are

required in Markowitz's model. But how accurate is the portfolio variance estimate as

provided by the single-index model's simplified formula? While the Markowitz's

model makes no assumption regarding the source of the covariance, the single-index

model does. Obviously, the accuracy of the latter model's formula for portfolio

variance is as good as the accuracy of its underlying assumption.

In passing, we have also mentioned in this unit other portfolio selection models, such

as `multi-index model' and `goal programming model' which have high intuitive

appeal but would require much more work before they outperform the simple ones.

11.6

KEY WORDS

problems.

Corner Portfolio is an efficient portfolio with the following property: any

combination of two adjacent corner portfolios will result in a portfolio that lies on the

efficient set between the two corner portfolios.

Single-Index Model purports to explain the covariance, which exist between the

returns on different assets on the basis of the relationship between the returns and a

single index, usually the market index.

Market-Index (or Market Portfolio) refers to the ultimate market index, containing a

common fraction of the total market value of every capital investment in the economic

system.

Characteristic Line shows the linear relationship between the return on any asset

and the return on the market index.

Systematic (or Market Portfolio) risk is that part of an asset's total risk whch is

related to moves in the market index and, hence, cannot be diversified away.

Beta Coefficient refers to relative measure of sensitivity of an asset's return to

change in the return on the market index. Mathematically, the beta of an asset is the

asset's covariance with the market index divided by the variance ofthe market index.

Unsystematic (or Diversifiable) Risk is that part of an asset's total risk which arises

out of factors unique to the asset. Such risk can be diversified away through portfolio

investment.

Simple Linear Regression (or Ordinary Least Squares) refers to a statistical model

of the relationship between two random variables in which one variable is

hypothesized to be linearly related to the other. This relationship is depicted by a

regression line which is a straight line fitted to pairs of values of the two variables, so

that the sum of the squared random error terms is minimized.

Multi-Index Model purports to explain the covariance that exist between assets on the

basis of changes over time in two or more indices, such as the market, GDP, or the

money supply.

33

Portfolio Theory

goals. When no feasible solution exists, the goal-programming model permits attaining

the goals as closely as possible.

11.7

1)

SELF-ASSESSMENT QUESTIONS/EXERCISES

Explain in your own words the following:

a)

b)

c)

d)

of assets in the portfolio is increased.

2)

Consider the data pertaining to the three-assets case used in this Unit to

explain the application of Largrange Multipliers Technique. Assuming a

target expected rate of return (Rp) of 6 percent, determine the minimumvariance portfolio (specify the proportion of funds to be allocated to each

share). What is the standard deviation of portfolio return?

3)

Monthly return (excluding dividend) data are presented below for each of the

three shares and BSE National Index (1983-84 =100) for an 18-month period

(Oct. 1990-March 1992). Compute the return and standard deviation of a

portfolio constructed by placing one third of your funds in each share, using

(a)

(b)

Month

1

11.8

Do the answers in (a) and (b) above differ? why?

ITC

9.43

Tata Steel

45.57

5.98

7.41

0.00

-14.78

-9.68

-4.31

-5.10

-8.93

-7.35

-18.92

-19.35

-13.73

-14.64

-6.67

1.67

13.64

1.58

28.57

10.66

12.00

15.19

20.00

3.11

2.93

10.92

-0.87

0.76

5.25

-6.74

-2.63

-0.97

10

21.45

20.56

17.12

10.44

11

23.13

13.36

15.38

17.47

12

13

14

15

16

17

18

32.83

1.52

11.99

-23.08

6.00

44.26

56.82

-3.66

-6.33

2.70

7.46

23.27

5.63

27.74

1.33

1.32

16.88

5.56

9.47

4.81

76.15

6.42

-3.13

5.42

-2.08

10.06

17.68

29.59

2.68

-5.33

5.11

FURTHER READINGS

International, Inc.

Alexander, Gordon J. and Sharpe, William F., and Jeffery V. Bailay, Fundamentals of

Investments, 3rd Edn., Prentice-Hall. Inc.

34

Appendix

Portfolio Selection

Table 11.1: Monthly Return of Sensex and Select Stocks and Beta Computation

Month End

Sensex

Castro!

Colgate

Infosys

30-Jan-1997

7.65%

-0.12%

6.98%

0.03%

27-Feb-1997

-2.34%

0.18%

11.88%

14.83%

27-Mar-1997

8.98%

5.35%

10.53%

15.27%

5-Apr-1997

27-May-1997

27-Jun-1997

25-Jul-1997

27-Aug-1997

26-Sep-1997

27-Oct-1997

27-Nov-1997

26-Dec-1997

27-Jan-1998

27-Feb-1998

27-Mar-1998

27-Apr-1998

27-May-1998

26-Jun-1998

27-Jul-1998

27-Aug-1998

25-Sep-1998

27-Oct-1998

27-Nov-1998

24-Dec-1998

27-Jan-1999

27-Feb-1999

26-Mar-1999

26-Apr-1999

27-May-1999

25-Jun-1999

27-Jul-1999

27-Aug-1999

27-Sep-1999

27-Oct-1999

26-Nov-1999

27-Dec-1999

27-Jan-2000

25-Feb-2000

27-Mar-2000

27-Apr-2000

26-May-2000

27-Jun-2000

27-Jul-2000

25-Aug-2000

27-Sep-2000

27-Oct-2000

27-Nov-2000

27-Dec-2000

25-Jan-2001

27-Feb-2001

27-Mar-2001

27-Apr-2001

25-May-2001

27-Jun-2001

27-Jul-2001

27-Aug-2001

27-Sep-200

25-Oct-2001

27-Nov-2001

27-Dec-2001

25-Jan-2002

Beta

2.41%

-3.48%

11.93%

1.37%

-2.20%

-4.21%

0.23%

-7.78%

0.15%

-9.83%

10.56%

7.91%

4.46%

-7.49%

-16.11%

-2.64%

-3.58%

8.36%

-10.I7%

-3.89%

6.48%

13.18%

1.36%

5.82%

-9.79%

19.02%

6.45%

11.71%

6.04%

-3.18%

0.86%

-1.08%

2.41%

11.43%

4.73%

-8.48%

-9.07%

-12.71%

14.74%

-8.66%

3.17%

-5.72%

-10.45%

6.44%

-2.31%

11.67%

-6.02%

-9.21%

-7.36%

6.93%

-6.78%

-4.69%

2.05%

-18.17%

11.29%

8.78%

-4.74%

6.40%

1.0000

-4.64%

-2.63%

18.46%

31.21%

5.11%

-6.44%

-1.27%

12.78%

3.35%

-7.55%

0.65%

-0.36%

0.40%

-7.15%

-11.72%

-9.72%

7.03%

9.97%

3.87%

-1.15%

12.36%

19.18%

-1.80%

0.24%

-5.48%

8.25%

-1.19%

4.82%

2.97%

-14.02%

-5.09%

-3.83%

-10.10%

13.61%

-13.93%

1.70%

-4.66%

-3.87%

5.92%

-14.00%

0.57%

-8.96%

-19.15%

24.56%

12.42%

-5.00%

1.74%

-8.86%

-6.28%

4.79%

-6,06%

-3.64%

23 .55%

-2.74%

-1.64%

-22.79%

-4.79%

3.84%

0.49735

-1.73%

-7.21%

-1.47%

7.45%

5.14%

-8.84%

-0.85%

-6.78%

-8.47%

-6.04%

7.79%

8.46%

1.83%

-11.87%

-9.59%

12.78%

-19.58%

-5.18%

-12.86%

0.96%

13.60%

7.72%

-14.19%

-2.61%

1.17%

18.86%

-1.02%

27.70%

8.43%

-5.01%

-2.35%

-14.41%

-2.34%

0.00%

-27.40%

-5.97%

-3.01%

12.41%

7.36%

10.91%

-16.67%

-0.87%

-3.46%

6.36%

-0.61%

-10.24%

-1.05%

-12.10%

10.45%

0.43%

-7.07%

-0.53%

2.67%

-4.21%

2.21%

0.56%

1.32%

-5.16%

0.4392

19.97%

10.62%

23 .79%

12.42%

30.34%

21.17%

-13.59%

3.81%

-17.87%

-2.68%

22.36%

20.00%

26.28%

17.17%

-11.16%

12.21%

6.69%

-5.18%

-2.76%

-3.66%

24.04%

59.68%

25.65%

-7.42%

-4.39%

23.61%

14.02%

23.33%

24.44%

25.43%

6.92%

28.03%

31.66%

15.45%

19.54%

19.53%

-23.70%

-24.82%

36.20%

-16.87%

19.13%

-7.70%

-3.44%

5.3 7%

-27.45%

23.12%

-15.97%

-18.29%

-30.45%

29.07%

-15.31%

2,35%

7.93%

-39.81%

28.41%

24.69%

4.02%

-2.33%

1.5338

35

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